Is Zhejiang Tengy Environmental Technology (HKG:1527) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Zhejiang Tengy Environmental Technology Co., Ltd (HKG:1527) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhejiang Tengy Environmental Technology

What Is Zhejiang Tengy Environmental Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Tengy Environmental Technology had CN¥55.0m of debt in December 2022, down from CN¥115.2m, one year before. However, it does have CN¥241.0m in cash offsetting this, leading to net cash of CN¥186.0m.

How Healthy Is Zhejiang Tengy Environmental Technology's Balance Sheet?

According to the balance sheet data, Zhejiang Tengy Environmental Technology had liabilities of CN¥701.5m due within 12 months, but no longer term liabilities. On the other hand, it had cash of CN¥241.0m and CN¥786.7m worth of receivables due within a year. So it can boast CN¥326.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Zhejiang Tengy Environmental Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Zhejiang Tengy Environmental Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhejiang Tengy Environmental Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhejiang Tengy Environmental Technology had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥472m. That makes us nervous, to say the least.

So How Risky Is Zhejiang Tengy Environmental Technology?

Although Zhejiang Tengy Environmental Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥54m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Zhejiang Tengy Environmental Technology is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.